Can the Taskforce on Nature-related Financial Disclosures solve the global ecological crisis?

There has been a recorded 83% extinction of wild mammals and a 50% decline in the species of plants, according to the World Economic Forum (WEF). Those stats alone are stark, but not necessarily useful in helping corporate decision-makers understand the consequences of the impending ecological breakdown.

However, other stats from WEF are much more tangible for business. Around $44trn – more than half of global GDP – is exposed to risks from nature loss. Similar research from WWF found that nature loss will cost the global economy at least £8trn by 2050 without transformational action from the public and private sectors, alongside governments. In short, ecological ruin leads to economic ruin.

Fortunately, work has been underway for several years now in an attempt to gain a better understanding of the financial risks linked to nature, and how better spending and corporate habits can deliver economic boons through restorative and regenerative practices.

Today, (4 June) marks the formal launch of the Taskforce on Nature-related Financial Disclosures (TNFD). The initiative was first announced in July 2020, with an informal working group set up two months later comprising of 74 financial institutions, corporates, governments, regulators, multilaterals, NGOs and consortiums, spearheaded by Banorte, BNP Paribas and the Green Finance Institute.

The aim of the TNFD was to compliment the growth of the Task Force on Climate-related Financial Disclosures (TCFD), which is gaining popularity amongst corporates and financial markets in outlining the economic risks associated with the climate crisis. The TNFD follows a similar pattern; it aims to give companies and financial institutions a complete picture of their environmental risks.

Two co-chairs of the TNFD have been announced: David Craig, chief executive of Refinitiv and Group Leader of Data & Analytics Division at London Stock Exchange Group (LSEG), and Elizabeth Maruma Mrema, Executive Secretary of the United Nations Convention on Biological Diversity (CBD).

For Maruma Mrema, the TNFD’s success hinges on the uptake of a soon-to-be-established framework of advice that gets corporates and financial institutions articulating the risks of biodiversity in cohesion.

“Science and economists are clear: nature is too big to fail,” Maruma Mrema says. “The health of the ecosystems on which we, and our economies, depend is deteriorating more rapidly than ever. Over the next few years we will work with Taskforce members, and other stakeholders, to design a framework that can be impactful and ultimately practical to companies and financial institutions.

“We encourage a wide range of financial institutions and corporates to participate in the TNFD and to become early adopters of the TNFD framework when it launches in 2023.”

Defining the metrics

Risk mitigation appeals to financial institutions for obvious reasons, and businesses have been using the TCFD framework to uncover looming risks based on the speed – whether rapid or sluggish – of the low-carbon transition. Whereas the TCFD enables businesses to map performance against a range of climate scenarios, the TNFD also incorporates nature and biodiversity, a subject currently lacking defined metrics.

Biodiversity, as a corporate and political concept, remains largely undefined. The publication of the Dasgupta Review on the Economics of Biodiversity is the latest major piece of work attempting to explore the role of natural capital in delivering planetary, societal and economic prosperity. However, even as these pieces of work evolve, it is a difficult task for corporates to place biodiversity into decision-making processes if the risks and opportunities remain largely undefined.

The impending TNFD framework is therefore crucial in opening the eyes of the private sector to the opportunities that restoration and regeneration bring. Research has found that improving nature protection and restoration could generate up to $10.1trn in annual business value and create 395 million jobs by 2030.

Of course, what solutions should be utilised to deliver this economic boon also remain undefined. Tree planting is a common tool used by corporates, but research has started to outline the potential benefits of lesser-known natural habitats. A four-fold increase in investment into Nature-based Solutions (NbS) is also touted as critical to reversing the ecological crisis.

The UK’s marine assets, for example, include renewable energy production, tourism attraction, sustainable fishing and carbon sequestration, which have reached a value of £211bn, according to figures from the Office for National Statistics (ONS).

In 2019, 21.8 million hectares of UK waters are protected to some degree. Over a ten-year period, the percentage of surface water bodies classed as high or good has risen from 70% to 76%. However, seagrass, one of the best carbon sequestrators is at risk from climate change and manmade pollution. Coastal protection is largely provided by saltmarshes and seagrass beds. Yet the UK has already lost up to 92% of its seagrass in the last century and 85% of its saltmarsh.

The TNFD hopes that capturing better nature-related data will lead to informed decision-making from investors, not just on what sectors are contributing to ecological breakdown, but what markets and solutions can reverse it.

“Without urgent action, ongoing loss to biodiversity poses unprecedented risks for business, both now and in the future,” the TNFD’s co-chair David Craig says. “Better nature-related data that enables informed decision-making by financial institutions and companies is how we will solve the global ecological crisis.

“Financial disclosures are essential to a market-based solution to nature loss. A properly functioning, informed market will price in risks appropriately and be empowered to channel investments to more sustainable opportunities.”

Disclosure drive

The TNFD will be similar in format to the TCFD, launched by Mark Carney and Mike Bloomberg in December 2015 and expanded with a specific framework in 2017. At present, more than 1,500 organisations are supporting TCFD recommendations, including corporates with a combined market cap of $12.8trn. Nonetheless, challenges remain in aligning disclosure levels with investor demands.

In order to avoid clashes with other similar initiatives, TNFD’s partners are engaging with the OECD’s multi-stakeholder group on business, finance and biodiversity; the Natural Capital Coalition; Business for Nature; the Banks and Supervisors Network for Greening the Financial System and others.  

According to CDP, environmental disclosure has “become a business norm over the last 20 years”, with more than 1,000 organisations covering 50% of the global market value now providing data through the CDP platform.

For the organisation’s executive director Nicolette Bartlett, the TNFD is an “exciting opportunity” to create a unified reporting system that outlines opportunities for businesses to thrive as the economy becomes more regenerative by championing, rather than threatening, nature.

“The TNFD is an exciting opportunity for a unified global response to the crisis of nature loss, which CDP is supporting,” Bartlett says. “There is a growing recognition that the financial world is not separate from the natural world. Water pollution and scarcity, deforestation and biodiversity loss are urgent global challenges, that the private sector plays a vital role in addressing.

“And yet private sector transparency and reporting, as well as levels of action and ambition, have up until now lagged far behind climate change. We’re encouraged to see the growing understanding that these challenges are all inextricably linked.

“Companies are exposed to increasing risk from their impact on nature loss — as are the financial institutions that invest in, lend to or insure them. For the health of our economies and societies, the private sector needs to better incorporate nature into their decision-making; shifting finance away from destructive activities and towards the transition to a truly sustainable economy. The new TNFD will help galvanize this necessary shift, and support companies in facing up to the material risks that destruction of nature poses to business — and seizing the opportunities promised by a nature-positive economy.”

Bartlett adds that CDP will be evolving its disclosure system over the coming years to account for the net-zero movement and will expand its work on nature. It will work with BNPP AM and partners on the “integration of common biodiversity metrics for corporate reporting”.

Bad spending habits

Indeed, the TNFD will create better access to data that will allow investors to map how their spending habits are contributing or preventing ecological breakdown.

Some of the world’s largest banks have been linked to industries that are causing mass deforestation and biodiversity loss, with some in the finance sector providing loans and underwriting worth more than $2.6trn to climate-wrecking initiatives.

The Bankrolling Extinction report has claimed that 50 global banks, including Bank of America, Citigroup, JP Morgan Chase, Mizuho Financial, Wells Fargo, BNP Paribas, Mitsubishi UFJ Financial, HSBC, SMBC Group and Barclay, together provided loans and underwriting worth more than $2.6trn to the food, forestry, mining, fossil fuels, infrastructure, tourism and transport and logistics sectors in 2019. According to the report, these industries are primary drivers of biodiversity loss and overfishing. On average, each of the 50 banks was linked $52bn in finance that is causing biodiversity loss risk.

Some banks have started taking action. Last year, HSBC partnered with Pollination to launch what it described as the first large-scale investment fund focused solely on nature conservation and restoration. The fund, due to launch this year, will aim to raise $1bn to finance “a diverse range of activities that preserve, protect and enhance nature over the long-term, and address climate change”.

Of course, the likes of AXA and BNP Paribas are hoping to de-risk their spending by signing up to the TNFD. Indeed, BNP Paribas’s chief executive Jean-Laurent Bonnafé claims that the TNFD is “key in convening market participants towards such standards” that they have introduced on biodiversity.

Policy is key

Standards at an international level are still suffering from a lack of definition.

The UN’s 15^th COP on biodiversity will be taking place in China this year, having been moved from its original November 2020 date due to Covid-19. At the conference, attendees will negotiate a “Paris-Agreement-style” accord aimed at preventing Earth’s sixth mass extinction.

Two technical committees of the Convention on Biological Diversity (CBD) have commenced meetings running through to mid-June to formalise a ‘global biodiversity framework’ that would be adopted by governments across the globe. However, an open letter from the CBD-Alliance calls for the proposals to be rejected in favour of a more ambitious action plan aimed at protecting biodiversity.

The Alliance notes that the proposed framework fails to properly integrate feedback on the earlier drafts that were submitted to the CBD.

In the letter, the CBD-Alliance, consisting of hundreds of NGO members and academic experts, warns that the proposed framework omits “critically important” responses to biodiversity loss, notably by reducing over-consumption in developed countries.

In preparation for the COP biodiversity conference, the UN is urging corporates in the financial sector to set time-bound numerical targets for reducing the biodiversity impact of their operations and investments. Such businesses should aim to have a net-positive impact on nature, the UN argues. But it appears that policy may need to be part of the new dialogue that the TNFD will create between corporates and investors.

In 2019, for example, the UK unveiled its Green Finance Strategy. The strategy features investment and funding increases into green projects, infrastructures and homes and is built on findings from the TCFD. Indeed, the UK is set to introduce a legal mandate for private-listed firms to disclose climate-related data as part of financial filings.

It is likely that the findings from any TNFD framework could be captured by updates to UK policy, notably through the Green Finance Strategy or the Environment Bill. Policymakers are welcoming the formation of the Taskforce but it will be unity and understanding across all stakeholders that will create metrics to truly reverse ecological breakdown.

“If we are to halt the destruction of the natural world, we urgently need financial decision making and investments to take account of nature,” the Minister for Pacific and the Environment at the Foreign, Commonwealth & Development Office (UK), Lord Goldsmith says.

“The launch of the TNFD marks an important milestone in this process, building a framework to help lenders and investors make informed decisions that are aligned with climate and the natural environment. Its launch is also an important milestone in the delivery of the UK government’s Green Finance Strategy.

“We have supported this market-led initiative from its very inception and commend all the stakeholders involved in persevering against all odds, and putting in so much time and effort towards reaching this stage. We welcome the two excellent and committed co-chairs and look forward to building a successful, international, market-ready framework.”

So, the theme of day one for the TNFD is that of optimism. If the Taskforce can replicate the success of the TCFD and build on works such as the Dasgupta review, we could soon be approaching a time where policymakers, investors and corporates all understand the value of biodiversity and bake it into decision making as part of the green recovery.

Matt Mace